Mismeasuring Poverty

The way we determine who needs help blocks many poor people from receiving the assistance they need.

The “facts” about poverty can be deceiving. In her magisterial book Behind the Beautiful Forevers, Katherine Boo tells the stories of the inhabitants of a Mumbai slum on the edge of a sewage lake who lack jobs, housing, running water, health care, education, and police protection. It is not unusual to see rats and frogs fried for dinner, feet covered with black fungus, and maggots breeding in wounds wrought by trash-picking. Yet, Boo writes, “almost no one in the slum was considered poor by official Indian benchmarks. … [They] were thus part of one of the most stirring success narratives in the modern history of global market capitalism.” Some success.

Our government’s own count of the poor, while not denying their existence, also minimizes their number—not by undercounting them (though that’s a factor, too) but by setting the poverty bar so low that tens of millions of poor Americans are not accounted for. This miscategorization not only paints a picture of a more prosperous America than in fact exists. It also excludes large numbers of the poor from assistance that they need and might otherwise obtain.

In fact, the poor are with us today in greater numbers than we have seen since we started keeping track over half a century ago. If we counted them by the standards that most other industrialized democracies employ, their numbers would increase by half*—from 46 million to roughly 69 million. To understand how that can be, it is important to grasp the way we define poverty and what that definition has to do with economic hardship.

The United States measures poverty by a standard developed almost 50 years ago by Mollie Orshansky, a Social Security Administration official. At that time, the typical family spent about one-third of its income on food. Orshansky calculated the costs of an emergency food budget, which would provide adequate nutrition for only a short time, and also a low-cost budget, which would provide adequate nutrition for the entire year. She then multiplied the cost of each budget by three to arrive at two poverty thresholds.

Orshansky wanted to use the low-cost food budget to compute poverty thresholds. It made sense to base the poverty line on a food budget that would allow adequate nutrition for an entire year. However, President Lyndon Johnson and his Council of Economic Advisers decided to use a figure close to the emergency food budget to set poverty-level income. Since then, the figure has been updated annually for inflation.

The problems with the official measure have long been recognized. Not only are the original thresholds too low but they are based on outdated assumptions about family expenditures. Food now makes up about one-eighth of an average family’s expenditure. At the same time, the costs of housing, child care, and health care have grown. Thus the official poverty level no longer reflects the true expense of supporting a family at the minimally adequate level. In addition, the current poverty measure is a national standard that does not adjust for variations in the cost of living from state to state and among urban, suburban, and rural areas.

The official poverty standard also fails to accurately tally family resources. When determining whether a family is poor, income is counted before subtracting taxes, resulting in an overestimation of how much families have to spend on basic needs. On the other hand, the method understates the resources of families who receive some types of government assistance, because the federal Earned Income Tax Credit (EITC) is not counted, nor are in-kind government benefits such as food stamps and housing assistance.

Last year, the Obama administration released a new measure of poverty called the Supplemental Poverty Measure (SPM), which does not replace the official measure but will be published separately. The SPM is based on an approach recommended in 1995 by the National Academy of Sciences. It adds in-kind aid such as nutritional assistance and subsidized housing and subtracts necessary expenses such as taxes, child care, and other work-related costs as well as out-of-pocket medical expenses. Its thresholds are calculated by ranking households by what they spend on food, clothing, utilities, and shelter and setting the poverty threshold at the 33rd percentile of that ranking.

In 2010, according to the official poverty measure, 46.2 million people (15.1 percent of America’s population) were poor, while 49.1 million (16 percent) were considered poor using the SPM. There were, however, some important differences between the two measures. Child poverty is lower under the SPM, because it takes into account the EITC and food stamps. By contrast, the poverty rate for elderly Americans is higher, because unlike the official measure, SPM subtracts out-of-pocket medical expenses from income.

The SPM gives us a more accurate picture of the poor. However, it doesn’t fix the fundamental problem with the U.S. poverty threshold, which is, as Shawn Fremstad from the Center for Economic and Policy Research puts it, “the extent to which it has defined deprivation down over the last several decades because it has not kept pace with changes in typical living standards in the United States.” The SPM starts at too low a level, and, as Fremstad points out, it can actually lower poverty thresholds if consumer expenditures on housing, utilities, and food decline—as they have between 2008 and 2010 as a result of the recession and lower housing prices.

The poverty line was roughly equal to 50 percent of median income when it was set in the 1960s. It has now declined to about 36 percent. So today’s official poor are further behind the average income—in a word, poorer—than their counterparts were 50 years ago. If we measured the number of Americans who are below 50 percent of the median income, 22.6 percent (69.1 million) are poor—nearly half again as high as the official poverty rate of 15.1 percent.

Most other developed countries use a measure of poverty based on the share of families below 50 percent or 60 percent of median income. Adam Smith explained the rationale for this in The Wealth of Nations. He defined the lack of “necessaries” as the experience of being unable to consume “not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without.”

Several organizations have attempted to quantify what a family requires to meet basic needs. The Economic Policy Institute has created Basic Family Budgets for more than 600 localities across the country. Wider Opportunities for Women has developed a Self-Sufficiency Standard for different family types in more than 80 localities in 36 states, and the National Center for Children in Poverty has designed Basic Needs Budgets.

All of these efforts show that families must have an average income of at least twice the current poverty level to cover basic expenses. More than one-third of Americans—more than 100 million—live beneath that more realistic threshold. These family budgets include only the most essential living expenses and are based on modest assumptions about costs. For example, the budgets assume that family members have access to employer-sponsored health coverage when not covered by public insurance, even though the majority of low-wage workers don’t have employer coverage. The budgets do not include money to purchase life or disability insurance or to create a rainy-day fund that would help a family withstand a job loss or other financial crisis. Nor do they allow for investments in a family’s future financial success, such as savings to buy a home or to fund a child’s education. In short, these budgets indicate what it takes for a family to cover their most fundamental living expenses—enough to get by but not enough to get ahead.

In 1964 when the War on Poverty was launched, the Economic Report of the President explained: “By the poor we mean those who are not now maintaining a decent standard of living —those whose basic needs exceed their means to satisfy them.”

There are tens of millions of Americans today “whose basic needs exceed their means to satisfy them” who are not classified as poor and who therefore cannot receive the assistance they need. That is the problem with how we define poverty.

*CORRECTION: This story was corrected on July 3, 2012. An earlier version, which ran in the Prospect's July/August print edition, stated that counting America's poor by the standards most other industrialized democracies employ would increase the number of poor Americans by a third. It would increase the number by half.